GM faced the classical agency problem where the interests of owners and managers are not aligned with each other. Usually, if the managers (executives) own 40-5

GM faced the classical agency problem where the interests of owners and managers are not aligned with each other. Usually, if the managers (executives) own 40-50% or more, OR own less than 10% of the share, their interests are well aligned with those of the common shareholders because if the company benefits, they benefit. It is when senior managers own between 15-25% of the stock that they tend to use their positions for their personal benefits instead of those of the shareholders. This is known as entrenchment. For companies where managers own 0-10% of the stock, cash bonuses make them take larger short-term risks. A better solution is long-term stock options for the senior executives and cash for the middle or lower levels. However, as recent turn of events has shown, lots of companies give these kind of stock options to lower and middle level managers who ended up with their entire life savings in the very companies that went bankrupt. The senior management was getting extremely large cash bonuses and thus they had no incentive to care for the long-term growth of the firm.